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The definition and scope of the corporate governance widened, when the Cadbury report
issued in 1993, where it is stated: Corporate Governance is a mechanism to direct and
control the corporate. The expansion in the definition of corporate governance in the form
of word control suggest monitoring the management and employees of the corporate in
the best interest of stakeholders and reducing the opportunities of misappropriation of
resources by management and employees of corporate.
One of the important features of these crises is the ugly side of capitalism. Where the
blind forces of the market drives the managers to invest in the speculative activities so,
that they can maximize their interest from the corporate at the cost of stakeholder’s
wealth. (Hutton, 1995, Hutton and Giddens, 2001)
The central issue in the corporate governance is the structure of corporate and nature of
the business. Which is as follow: the no. of people who purchase the shares, provide the
capital to the corporate and entitled as the actual owners of the corporate. These actual
owners of the corporate select the BOD to look after the affairs of the company. Now
these directors are agents of the company and their duty is to monitor and control the
affairs of the company in the best
Introduction
Using the corporate rating as a proxy for the default risk we want to investigate whether,
the corporate with the strong Corporate Governance has the higher Corporate Rating or
not i.e. the low (high) Default risk.
The Corporate Rating reflects a Corporate Creditworthiness and default risk (Standard &
Poor’s 2002). This is the reason, why rating agencies are concerned with Corporate
Governance, because the poor Corporate Governance does not only destroys the financial
position of the corporate but also results in the losses to major stakeholders i.e. owners
and creditors of the companies (Fitch Ratings, 2004).
Framework
As discussed in literature review the need of corporate governance is because of
separation of ownership and control. Those who invested the money they are owners of
the company but they are not in control of the business, because of the unique structure of
this business. So, those people which are in control of the business they are agent and
play with the wealth of principal or owner. These agent in the past tried to misappropriate
the resources of principal and the made the regulatory bodies to think about the protection
of shareholders and creditors.
PROCEDURE
CORPORATE GOVERNANCE
EXTERNAL AUDIT
SIZE
REPUTATION LIQUIDITY
LEVERAGE
GROWTH PERFORMANCE
DEFAULT RISK
( Daily, and Dalton1994). Discuss following issues related with corporate governance
and Bankruptcy. Whether bankrupt firms have joint CEO- board chairperson structure?
Whether board composed of affiliated director increases the likelihood of bankruptcy of
firm? Whether the firm with duality and affiliated directors have more bankruptcy? To
find the answer of first question the data of corporate structure i.e the firms with one
person as a CEO- and board chairman and the firm with separate CEO and Chairperson
was taken and regressed against the financial variables like profitability, leverage etc
using the logistic regression model and observed those firms with joint CEO-chairman
structure has more chances of Bankruptcy. To find the answer of second question, data of
100 firms were collected from 1972-1982. These 100 firms were included the Major
Bankrupt 57 corporation from 1972-1982 and 57survivor firms from 1972-1982.
Proportion of affiliated director is regressed against the financial variable used in this
study like profitability, leverage etc. Using the logistic regression and it has been
observed, as the proportion of affiliated directors in the composition of BOD increases
the bankruptcy increases. To find the answer of third question which is basically the
combination of the first two questions has also been observed using the same data and
observed , as the proportion of affiliated directors and duality in the Board structure
increases a distinguish is created between the Bankrupt Firm and Survivor. Moreover, in
this study it is also concluded that the Corporation with the good qualification of BOD
has strong financial indicators and thus does not lead to the bankruptcy.
Jensen 1993) argues it is ineffective to have the large size of the board. According to him
agency problem with the large no. of directors in the board increases, because of more
conflicting groups representing their own diversified interests. And Free- rider problem
also increase as the few board members stop their duties of monitoring and controlling
the other members of board. Moreover, many companies have a representative from
minority shareholder which does not increases with increase of size of board of director
(Drobetz et al., 2004b). so a board comprised of six to fifteen members is an optimal
board for the improved performance of the company (Brown and Caylor 2004).